Escalating food prices show a green revolution is overdue. With the global population set to continue rising, action is needed now to fight starvation.
Feed the world, make it a better place
The need for food at affordable prices has always been a vital concern. It has often triggered immigration, revolution and war. Global food costs advancing to an all-time high last February - according to the measures of the UN's Food and Agriculture Organization (FAO) - served as a catalyst to the Tunisian revolution.
People with limited resources in Tunisia and in Egypt subsequently toppled their autocratic leaders in a move provoked in part by their governments' inability to curb excessive food prices. Understandably, a small change in prices influences people's behaviour in countries where food prices account for up to 50 per cent of consumer price indexes.
Short-term factors explain the recent increase in prices. A drought last summer in Russia caused its authorities to ban grain exports. Elsewhere, bad weather ruined crops in Canada and Australia, while Chinese rice production was hurt by floods.
In the short run, prices are mainly subject to supply disruptions. But the challenge caused by long-term demographics is more alarming. According to the FAO, world food production needs to increase by 70 per cent by 2050 to meet demand from the world's population, which is projected to rise by more than 30 per cent by then.
Pursuing another "green revolution" is vital to increase agricultural yields. The first green revolution of the late 1960s and 1970s enabled world food supply to increase threefold, thanks to crossbred crops, better fertilisers and higher degrees of mechanisation.
Today, for the first time since the first green revolution, growth of crop yields has slowed to an inferior rate compared with population growth. While yields of wheat crops, for example, grew at 3 per cent annually between 1961 and 1990 and to 0.5 per cent between 1990 and 2007, the average population growth during these periods was 1.8 per cent and 1.4 per cent, respectively.
As the recent special report on "feeding the world" by The Economist states, worldwide use of fertilisers and other inputs may have been scaled back in recent years, which would explain the slowdown. Farmers favouring quality such as more nutritious crops at the expense of quantity is part of the story. Farmers may also find value in satisfying demand for organic foods.
Various avenues are available to investors who want to help agricultural productivity increase. By financing operations in various fields, investors contribute to transforming our lives across the globe, as well as our eating habits. Investments in the industrialisation of farming inputs helped to double cereal production in Asia between 1970 and 1995, saving the Indian sub-continent from mass starvation, as the population increased from 670 million to 1.18 billion.
Today, further investments are needed in three distinct areas to increase farming productivity.
Firstly, there is still room for improvement in farm inputs. More efficient machinery, innovative seeds, products combating pests and diseases, as well as further developments in the field of cost-effective fertilisers will allow for smaller production costs, increased yields and lower food prices. Secondly, contributing to the expansion of advanced farming management techniques helps to bring about economies of scale and increased efficiency in food production and significant reduction in wastage.
As the worldwide farming industry is still fragmented, sustaining best practices in farming improves yields, raises the quality of farmland, cuts inputs and lowers overall costs.
Thirdly, the links between producers and consumers can also be improved. Many companies active in efficient distribution, logistical services, origination, storage and transportation make for attractive investment opportunities. Companies with good growth prospects include processors of farmed goods (including toxin removal) and those involved in food preservation and consistency.
The dream of eradicating starvation may one day come true. To help in this endeavour, investors can finance the companies best positioned to meet the challenges ahead. In addition to achieving a moral satisfaction, they may also achieve a compelling financial return.
Gertjan van der Geer is the senior investment manager in the Pictet-agriculture division of Pictet Asset Management